Will Offshore Oil Lubricate US–Cuba Relations?

One of Spain's largest oil companies, Repsol, is gearing up to spud a
deep, offshore well in Cuban waters, just 60 miles from the Florida
Keys. A huge rig is still en route to the site from Singapore, and as it
draws closer to its destination the zealous opposition from Floridian
politicians who rely on the Cuban expatriate vote gets louder.

They
argue that the well should not be allowed to proceed because it
violates the embargo and on a deeper level, that any oil found would
prop up the Cuban regime. The first claim is incorrect – it does not
violate the embargo as there are no American companies involved; but the
second claim deserves closer inspection. Indeed, oil experts say Cuba
may have as much as 20 billion barrels of oil in its as-yet untapped
portion of the Gulf of Mexico, though the estimate from the US
Geological Survey is considerably more modest, pegging potential
reserves at 5 billion barrels.

And yes, finding and developing oil
resources in Cuban waters would provide a major boost to the country's
struggling economy and would help to reduce its total dependence on
oil-rich, leftist ally Venezuela. Fidel Castro's close ally Hugo Chavez
currently dispatches 120,000 barrels of oil a day to Cuba on very
favorable financing terms. However, the arrangement is heavily dependent
on the friendship between octogenarian Castro and cancer-stricken
Chavez… hardly a recipe for permanence. Cuba's oil contracts with Repsol
and various other international partners probing its waters call for
Cuba to get 60% of the oil, so a few good wells would make a marked
difference for the Caribbean nation.

But the more pressing issue is proximity. If this well were to blow – like the Macondo well did – the two American companies that provide blowout-containment
services to deepwater drillers in the Gulf of Mexico would not be
allowed to come to its aid. Yes, it is possible to obtain exemptions
from the embargo, but spill responses are based on a simple premise:
Everything has to be on standby, ready to go. While US officials say
there is a longstanding practice of providing licenses (embargo
exemptions) to address environmental challenges in Cuban waters, and
Americans have previously provided booms, skimmers, dispersants, pumps,
and other equipment to respond to a spill, obtaining exemptions from
international embargoes does not fit the ready-to-go picture.

The
Repsol well will sit just 60 miles from the Marquesas Keys, an
uninhabited group of islands near Key West in an area of strong, 4-6
mile-per-hour currents that come from the Gulf, shoot through the
Florida Straits, and then churn northward up the Atlantic Coast. It
would take only a few days for an oil spill to reach the Keys. In fact,
Repsol's well will be twice as close to US shores as drillers in
American waters are allowed to operate.

Any angst over the
situation should not be directed toward Repsol, as the Spanish company
has done nearly everything it can to placate American concerns. The
company has offered US agencies an opportunity to inspect the drilling
vessel and its equipment before it enters Cuban waters, and Repsol
officials have stated publicly that in carrying out its Cuba work it
will adhere to US regulations and the highest industry standards. The
only thing Repsol has not done is concede to demands from some US
Congresspeople to walk away from the project, which the politicians
described in a letter to Repsol as a venture that "endangers the
environment and enriches the Cuban tyranny."

However, Repsol is
inclined to be accommodating because it is a publicly traded company. It
is the only such company operating in non-American Gulf waters – the
others operating or considering operating in Cuba's Gulf waters are
primarily national oil companies. The United States' sphere of influence
over these state-owned, national oil companies is far, far less; in
many cases, American desires have no bearing on these entities… and any
effort to exert influence over them immediately raises questions of
sovereign immunity.

So, while Repsol's case is at the forefront
for the moment, it seems that the US government needs to pay more
attention to these national companies and attempt to formulate a way to
engage in their exploration process. It's a complicated, sensitive
arena, incorporating issues like transboundary compensation for oil
pollution damages, the role of international oil pollution liability
conventions, and recovering costs when one country provides most of the
spill response and clean-up assets.

But there are quite a few
national oil companies interested in Cuba. Repsol is working in a
consortium with Norway's Statoil and a unit of India's ONGC. The
partners plan to drill one or two wells; once they are complete, the rig
will pass to Malaysia's state-owned oil company, Petronas, and then on
to another ONGC unit, ONBC Videsh, both of which have also leased
offshore Cuban blocks. Brazilian state oil company Petrobras is also
developing plans to explore its Cuban blocks.

The multinational
face of exploration in Cuba's waters is a good representation of the
support Cuba has received from the rest of the world. Indeed, every year
for the past 19 years, and soon for an almost-guaranteed twentieth
time, the United Nations General Assembly has overwhelmingly adopted a
resolution condemning the US embargo. Every year, something like 187 of
189 nations appeal to the United States to end the embargo, with
(usually) only Israel voting with the US.

Almost no one else supports the embargo, and it is time to assess whether it is still in the US's best interests.

The
embargo on Cuba represents the most comprehensive set of economic
sanctions the US imposes on any nation in the world. The goal has always
been to make the Cuban people suffer so much that they would tear down a
government that was at one point a Cold-War security threat. The US
has: imposed sharp limits on Cuba's access to American food, medicines,
and visitors; banned almost all other business activity; used sanctions
to stop third countries from trading with Cuba; blocked Cuba's access to
high-technology goods; and even siphoned off some of its most promising
thinkers by giving Cubans incentives to emigrate and persuading its
highly trained doctors to defect.

None of this has, of course,
caused an uprising, let alone broken the back of the Cuban system. It
has been a generation since the Cold War ended, since the Soviet Union
fell, and since the US intelligence community concluded that Cuba posed
no threat to American security. Why does the embargo still stand? Well,
for several reasons, two of the clearest being opposing communism in
general and maintaining political support from the large Cuban expat
community. However, another reason may be a lack of data. There is no
formal mechanism within the US government to monitor the impact of the
embargo on economic and social rights in Cuba; nor is there a process to
assess the impacts of the embargo on the United States.

Without a
way to gather this information, there are tough questions that remained
unanswered. Do the sanctions backfire and take away from everyday
Cubans the prospect for leading more prosperous and independent lives?
Is the embargo damaging US standing in Latin America? Do the sanctions
cost the US jobs for workers, markets, profits for businesses, or
liberties for American travelers?

These questions have lingered
for years, but with Fidel Castro having passed the reins over to his
slightly more liberal younger brother Raul, changes are afoot in Cuba
that make these questions more pressing. Adding all the new interest in
Cuba's deepwater oil potential to the mix only increases the pressure.

Raul
Castro took over the presidency in 2008, and his goal is to have 35% of
the economy privatized by 2015. In April the Cuban Communist Party
approved 311 decrees designed to meet that goal, though to date only a
few have passed into law. Those that have been enacted are mild relative
to the bigger picture of creating a private sector. Nevertheless, they
represent dramatic change for Cubans, who have not been allowed to buy
or sell vehicles or real estate for fifty years. Now they can.

For
the first time since the early years of Castro's 1959 revolution,
private individuals in retail services, agriculture, and construction
are allowed to hire employees, even though there remains an article in
the Cuban Constitution that says one's property and equipment "cannot be
used to obtain earnings from the exploitation of the labor of others."

Over
the next five years the regime intends to lay off up to a million
public sector workers – no less than 10% of its workforce. The food
rationing system, on which many Cubans rely daily, is also set to be
phased out. The goals are clear – to reduce the state payroll, boost
productivity (especially in the agricultural sector), and nourish the
private sector – even if the timeline and plans for dealing with the
fallout are far from clear.

Cuban authorities are careful to
depict this restructuring as upgrading the revolution, not forsaking it.
As one political analyst said, the Cuban government is trying to "let
the economic genie out of the bottle while keeping the political genie
in." It's a tough act. And the fact is that the regime can no longer
afford to finance the socialist ideas upon which it was founded. The
question is: Which way will it turn?

If reforms are too limited
and private enterprise remains too restricted to flourish, nothing much
really changes, aside from a few aspects of the current black market
becoming legal. At the other end of the spectrum is rapid and rampant
capitalism, with all of the debt and accumulation of wealth in the hands
of a few that today are such clear downsides of free-market economies.

The
Goldilocks answer is somewhere in between, positioning Cuba as a
miniature China with a mixed economy, the state holding tight grip over
some sectors but loosening control over others. The state will almost
certainly retain its grip over mining, oil, sugar, health care, and
tourism, cumulatively a large chunk of the country's economic strength.

Nevertheless,
even this partial transition to capitalism offers some good economic
opportunities to the US, if it were to open those avenues. The embargo
may be aimed at restricting the Cuban regime so harshly that it fails,
but it is also preventing the US from even encouraging, let alone
participating in, a more modern Cuba. In terms of the Gulf, the embargo
restricts US opportunities to provide exploration expertise to a
developing nation and to share in the spoils of that work, which could
be another, much-needed, convenient source of oil, while also
hamstringing the US's ability to protect its own waters.

[The US
can ill afford to turn its back on close sources of oil, especially with
a triple threat to the current supply looming large. Read this free report to learn more about it… and the profit opportunities it offers.]